Interest rates are at record lows. And while that's bad news for your savings account, it's good news if you have a home loan.
One question you might be wondering is whether to lock in your repayments by switching to a fixed rate mortgage.
There are pros and cons, so here are some important things to consider before you make your decision.
Fixed rate loans may help if you're on a tight budget
There are two key benefits to fixing your mortgage rate:
- 1.You know exactly how much your repayments will be over the fixed-period;
- 2.If interest rates increase during the fixed period, your mortgage rate won't increase.
Nick Georgiou is a financial counsellor working with the National Debt Helpline.
He says the predictability of fixed rate mortgages can be particularly helpful for first-home buyers and people on tight budgets.
"Knowing that your fortnightly or monthly repayments are going to be the same can make budgeting much easier," he says.
If you change your mind, you will have to pay a break fee
If you need to switch out of a fixed rate loan, you'll likely need to pay a break fee. And they can be significant.
Depending on your loan size, interest rate movements and your loan term, these fees can easily reach thousands of dollars.
"If there's a hint that you may consider moving homes or if you want to change loans, keep it variable because you don't want to pay that fee unless you absolutely have to," says Adrian Willenberg, a mortgage broker based in Melbourne.
Fixed rate loans often have limits on extra repayments
Most fixed rate home loans limit your ability to make extra repayments.
Typically, loans will allow for a certain amount of extra repayments each year or over the term of the loan. Once that limit is exceeded, further repayments attract fees.
If you are concerned about the repayment limits, but still want more certainty over your repayments, one option is to split your loan.
"Let's say someone is borrowing $500,000. They might choose to put $350,000 in a fixed rate loan, and leave $150,000 variable," Mr Willenberg says.
"That way they can keep making extra repayments into that variable loan portion."
If interest rates fall, you can end up paying more
The big risk with fixing your rate is that interest rates can continue to drop, leaving you paying more in interest than you otherwise would.
Mr Georgiou says interest rates are almost impossible to predict, so it's best to decide based on your individual financial circumstances.
"The point I would make is that any decision to fix your rate should be because you've assessed your budget, your affordability, and you want that certainty," he says.
"Or you don't, and you decide you want the flexibility of a variable rate.
"The decision should be based on that rather than an attempt to try to outsmart an entire market of very savvy investors, who generally have billions of dollars invested."
Fixed rate loans often have limited features
If you love to use your offset account or redraw facility, keep in mind these features are less common with fixed loans.
Sometimes they will be available for an extra fee, in which you case you really need to weigh up the benefits versus the costs.
Before you switch, look at a range of lenders
If you're thinking you might like to switch, it's important to do your research.
Here are some helpful tips from Mr Georgiou.
- 1.Research rates available from lenders;
- 2.There are websites that aggregate home loan products, and they can be useful. Keep in mind these sites may collect your data — and they may not list all the options;
- 3.Use a mortgage calculator to see how switching will affect your repayments.
Some people prefer to use a mortgage broker to help them compare and apply for products, but you can also do it yourself.
If you do decide to use a broker, it's still helpful to come armed with some knowledge about the products you might be interested in.
If you're struggling to make your home loan payments, there are options available
If your budget is tight, or if you're in financial difficulty, there is support available.
Financial counsellors like Mr Georgiou can't help you decide whether to fix your home loan, but they can help you get a clearer picture of your financial situation and your budget.
This article contains general information only. You should consider obtaining independent professional advice in relation to your particular circumstances.
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